Bond Refundings

A bond refunding is the replacement of existing bonds with new “refunding” bonds. It is similar to the refinancing of a home mortgage, where a homeowner obtains a new mortgage with a lower rate to pay off an older, more expensive mortgage.

When existing bonds are refunded more than 90 days in advance of their maturity, it is called advance refunding. When the issuer of the refunding bonds seeks to lower its interest payments by paying off its previously issued (refunded) bonds with newly issued bonds that pay interest at a lower rate, it is known as a “high-to-low” advance refunding.

Another reason to refund existing bonds may be to release the issuer from legal covenants or restrictions in the original indenture, instead of trying to lock in a lower interest rate. The issuer in this instance might end up issuing the new debt at a higher interest rate, in which case it would be known as a “low-to-high” advance refunding. In general, a tax-exempt bond issue can be advance refunded only once.

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